Gold is recognised worldwide for its stability. But while the value of gold transcends borders, the way in which the price of gold is determined remains more enigmatic. Since 2004, for example, there has been no official gold price in France. Instead, the fixing of the gold price is based on a complex network with one key institution: the London Bullion Market Association (LBMA).  

But how is the gold price determined? And how is the gold market organised today? This article explores the mechanisms by which the price of gold is set, their historical development, and the risks in the way the current market operates.

ARTICLE SUMMARY : 

• The end of gold price fixing in France
• Who sets the gold price today?
• A second central gold market: the CBOT
• Gold market: more paper gold than physical gold? 
• Can the gold price be ‘manipulated’?

The end of gold price fixing in France 

On 2 August 2004, France put an end to the official fixing of the price of gold. Until that date, the Banque de France published the official gold price, based on exchanges on the Paris Bourse. However, the reduction in the number of players on the French gold market and the move towards a more globalised and decentralised market meant that this pricing system had to be discontinued. Since then, Compagnie Parisienne de Réescompte (CPR) has taken over, publishing a reference price, known as ‘CPR Gold’, which subsequently evolved into ‘CPoR’ with the creation of CPoR Devises.  

Gold prices are published every day at 1pm on the Loomis FXGS website: Quotation & Products - FX, Gold and Services. This includes quotes for the main gold bars and coins, such as the famous Napoléon 20 francs. The exact contours of this quotation remain unclear. As a representative of CPR Or pointed out in 2019: ‘We publish our reference price every day at 1pm,’ explains François de Lassus, spokesman for Cpor. It is calculated on the basis of a number of factors, such as the London price per ounce (editor's note: the global benchmark), the cost of sourcing materials and buy and sell orders placed by banks on behalf of their clients.’ 

This change reflects a move towards the influence of the LBMA in London, which is now the global benchmark for the price of gold. 

Who sets the gold price today? 

For more than 20 years, the LBMA has been the central market place for gold. The LBMA, or London Bullion Market Association, is an international organisation based in London. Officially created in 1987 at the instigation of the Bank of England, the LBMA now has more than 150 members from over 30 countries. The market was created in 1919 by five major banks, originally headed by N M Rothschild & Sons, which met daily in a London office to establish a global reference price. The London Gold Fixing was a first step in fixing the price of gold. The aim was to provide a benchmark for transactions, offering market players (mines, refineries, jewellers, central banks) a common basis. 

Today, its members include international banks (such as HSBC, JP Morgan and UBS), as well as refineries (such as Argor-Heraeus and Metalor), mining companies, transporters and analysts. In short, all the major players in the market are represented. The LBMA is also known for its Good Delivery List, which sets strict quality standards for gold and silver bars, guaranteeing their purity, weight and traceability. 

The LBMA Gold Price is set twice daily, at 10.30am and 3pm (London time). The process is electronic and is based on an auction platform administered by an independent body, ICE Benchmark Administration (IBA). The price is determined by a mechanism that balances supply and demand from accredited participants, including banks, funds and other international financial institutions.  

A second central gold market: the CBOT 

However, the way in which the LBMA sets the price of gold is not the most common. As is customary for commodities, the price of gold can be determined by futures contracts. A futures contract is a contract under which two parties agree to exchange gold at a future date and at a predetermined price. The price of gold in the United States therefore depends essentially on derivative contracts. 

Founded in Chicago in 1848, the CBOT is one of the oldest gold exchanges in the world. Over time, this exchange has evolved to include a wider range of financial products, including precious metals such as gold. In 2007, the CBOT merged with the Chicago Mercantile Exchange (CME), forming the CME Group, which is now one of the largest financial markets in the world. As a result, the COMEX, a division of the CME Group, has become one of the main markets for gold trading. 

Unlike the LBMA, the COMEX allows investors to buy or sell futures contracts (essentially futures) on precious metals. The usefulness of these contracts is that they fix a future price and delivery date, providing a hedge against fluctuations in the gold price, or an opportunity for speculation. 

Gold market: more paper gold than physical gold? 

Around 250,000 gold futures contracts are traded daily on the COMEX in the United States, equivalent to nearly 25 million ounces of gold, or $72 billion in nominal gold! According to the World Gold Council, this still corresponds to almost 20% of all the physical gold traded in the world each year. Since 2020, these contracts have been based on physical delivery. In practice, the majority of contracts on the COMEX are ‘rolled’ (or ‘destroyed’), which means that contracts reaching maturity are rolled over to the following month, limiting the quantity of physical deliveries.  

In addition, this method of fixing the gold price makes it possible to observe more accurately the degree of optimism or pessimism of investors. The gold derivatives contracts (futures and options) offered by the CME have the advantage of making it easier to measure various parameters:  

• Open interest in contracts, which can confirm or deny the trend observed in the gold price. For example, an increase in activity on the COMEX may reflect greater interest following a movement in the gold price. 
• The volatility anticipated by investors, i.e. the instability in the gold price that investors expect to see in the coming months, tells us more about the mood of the market. What's more, gold's volatility is often between 10% and 20%. In other words, the volatility of the gold price is around 30% lower than the volatility of the main stock market indices. The chart below shows the gold price and its volatility.  
• Various ‘technical’ parameters, such as skew, convexity, etc., can be used to assess the degree of volatility of the gold price. These parameters allow us to judge the degree of investor confidence and, above all, the future direction of the gold price, which is mainly expected by the market. For example, a rather low convexity, i.e. an expectation of an acceleration in the price of gold that is rather high compared with the speed at which the price of gold moves, is often followed by a sharp rise in the price of gold in the months that follow. 

Source: CME Group Volatility Indexes (CVOL) - CME Group 

In London, it is also possible to track LBMA stocks (see below). For example, a fall in LBMA gold stocks indicates that investors are moving gold out of London and into other markets, such as New York recently.

Source: London Vault Data | LBMA 

Can the gold price be ‘manipulated’? 

Setting the gold price on the LBMA or COMEX has both advantages and disadvantages: 

Advantages: grouping together of the main players, such as banks and mining companies, geographical centralisation and processing of over-the-counter flows.  

Disadvantages: strong centralisation of the market, no flows induced by private individuals, lack of transparency on all transactions.  

As a result, manipulation can occur more easily than on a regulated market. For example, according to Paul Craig Roberts, the COMEX saw several manipulations of the gold price in 2013 and 2014.  In addition, some investigations revealed that banks had manipulated gold prices during daily fixings in London. According to a study published by American academics, ‘the structure of the benchmark index is certainly conducive to collusion and manipulation, and the empirical evidence is consistent with price artificiality’. However, long-term sustained manipulation seems unlikely and the LBMA denies any manipulation.

Conclusion 

In conclusion, the gold market is based on complex structures whose mechanics are evolving. The end of official gold price fixing in France in 2004 illustrates a transition to international mechanisms dominated by the LBMA in London and COMEX in the United States. These two institutions play complementary roles, with the LBMA setting a reference price through an electronic process based on supply and demand, while COMEX focuses on futures contracts for speculating or hedging against price volatility. 

However, these systems are not perfect. While centralised markets offer better liquidity and harmonised standards, they also suffer from potential risks of manipulation, as some past incidents have shown. The predominance of ‘paper contracts’ over physical gold can sometimes worry investors who are more interested in trading local gold.